I had a thread on this when it started. China is in the wrong here. They are developing on Bhutanese soil and using some British-Sino declaration as proof when those are the same declarations they declare null and void when it comes to other territories like with Nepal and India.
India has to stand up to China here. Not because they want to. Just like China does not want war with the US, India does not want war with China. But when an ally aka Bhutan asks you to,and you have a decades long policy to protect and represent Bhutan internationally, you have to. Additionally, the area China wants to develop is a strategic area that ties Indias eastern provinces to the sub-continent. China knows this. They plan to one day retake Arunachal Pradesh aka South Tibet and also want to diminish Indian control over the region. The Dalai Lama will pass soon, and they don't want the Tibetan government in exile finding a new one that won't be a puppet like the one they'll install in Tibet in the East.
China also cannot stop. This is their chance to humiliate India for not supporting the One Belt One Road initiative. They also have a chance to destroy India's support amongst allies. If India cannot help Bhutan how much can they help Sri Lanka, Nepal, Bangladesh. There is no Soviet Union to help them now. Plus, they have a chance to land grab territory, build and disrupt a vital part of North-Eastern Indian security etc. If they back down,the nationalists will rail against the CPC. It is why they talk tough even against the US when it sails ships through the South China Sea or stood by as Chinese mainlanders torched Japanese cars and rioted during the Daioyu/Senkaku islands dispute.
Everyone saying this won't be WWIII, maybe not. But these are two Asian nations. These are not countries who went through World Wars and pledged not to fight ever in terms of being belligerents or mobilized outside their countries in large scale. These are two countries hungry for greater geopolitical assertion and with large armies. Just like Russia invaded and annexed Crimea, I honestly believe you will see a limited hot war here. China will roundly defeat India because they have greater and faster force projection, and will again declare a ceasefire and both sides will come to an agreement with a possible Russian brokered peace. And it will also create lingering resentment which will again flare maybe 2030, maybe 2040 etc. Human history is seldom simple these days.